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Getting Started with Bitcoin, Part 1: What is a Wallet?

So you're curious about getting into Bitcoins! Now comes the hard part: swimming through the mounds and mounds of information and opinion that stands between you and getting started... and there is a lot of it!

Before diving head-first into unfamiliar websites or downloading something to your computer, there are many important things you should learn about Bitcoin. In this series of articles, I hope to break everything down into smaller, conceptual blocks so that you can learn about the functionalities of Bitcoin, the options you have as a user, the risks associated with those options, and finally, the security precautions needed to mitigate your risks.

The first step in getting started with Bitcoin is procuring a wallet. This article will help you learn what a Bitcoin wallet is, and how it works.

A Bitcoin wallet is composed of two parts: your public address and your private key. Together, these two things are much like a post office box: it has an address that you can share with anyone, but a key that only you hold. Owning the key is what enables you to spend the Bitcoins that are located at your address.

Unlike a P.O. Box, your Bitcoin wallet is not necessarily stuck in one place. Like any computer file, it can be copied to a USB Stick, sent to another computer, or uploaded to (and accessed via) "the cloud". Duplicating your wallet, however, DOES NOT duplicate your Bitcoins. To explain this, allow me to modify the P.O. Box analogy:

Imagine that the space behind your P.O.Box is a cache which is located far, far away. And imagine that the door to your P.O.Box is actually a portal to that cache. Whenever (and wherever) you copy your Bitcoin wallet, you are creating a new door to your cache. You can create an unlimited number of doors and place them wherever you want, but you will still only have one cache, with the same number of Bitcoins inside. All these doors still have the same address, and they all open with the same key.

Now, just as doors can be created, they can also be destroyed. If the only door is located on your home PC, and your computer is hacked or your hard drive crashes, you *could* lose access to your Bitcoins forever.

The devil, of course, is in the details. What I am about to say in INCREDIBLY IMPORTANT, so LISTEN UP: Your private key is the DNA of your Bitcoin wallet. From the private key alone, one can determine your P.O.Box number (Bitcoin address), and create a doorway to your cache (access & spend your Bitcoins). Since the private key is the genesis of all this information and power, the only way to protect your Bitcoin wallet is to protect your private key. Determining how you will protect your private key is where your options come into play. But there's a little more you need to know about wallets before you make this decision.

Your wallet interacts with the rest of the Bitcoin network through a piece of software called a Bitcoin Client. As I mentioned in my article, "Why Bitcoin CANNOT be Controlled by Government", when a user sends Bitcoins to another user, the transaction goes through a number of audits. The very first audit is done by the Bitcoin client to ensure that the sender actually holds the Bitcoins he or she is trying to spend. In order to perform this audit, every client has to have a copy of what is called the "Block Chain", which is a lot like a general ledger for a business. It is a COMPLETE LIST of every single Bitcoin transaction, and the balance of every single Bitcoin Address. The public distribution of the Block Chain is at the very core of why Bitcoin works (but I will save the details of that for another article).

The Block Chain, as you might have guessed, is a VERY large file, and it is downright impractical for some situations (mobile devices). Luckily, third parties have helped make Bitcoin a very versatile technology. You have options for the type of client / wallet service you can select, depending on how you plan to use Bitcoin. In the next section, I will elaborate on these options, the different technology & knowledge sets required, and the different levels of security & trust needed. (On to Part 2!)

Please leave your comments and questions below, as well as ideas for articles that you would like to see!

-Jix

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Thanks for the great introduction.

Probably the most clear explanation of the system that I've read so far. Thanks for taking the time to formulate it!

Jefferson's picture

A question

on anonymity. (Sorry if I'm jumping ahead)

Is it possible to be truly anonymous in the purchase of BTC's? I've read that you have to provide some sort of ID to purchase prepaid debit cards so wouldn't they be traced back to you?
I've also seen a website that finds local BTC vendors in your area, but you have to register with the site to get their info and communicate with them. Even if you found a vendor locally, wouldn't there still be a trail if you paid cash for BTC's?
Does a "tumbler" break any kind of trace back to the original purchaser?

Thanks in advance.

Yes it's

pretty easy to get bitcoins anonymously, especially if you're the least bit creative.

Most Bitcoin exchanges only require an email and password to signup and start buying/selling bitcoins. You can use a new email address not connected to you, for example, by signing up at hushmail.com. If you're really paranoid do everything over the Tor network to obscure your IP address too.

Same thing with localbitcoins.com. All they ask for to register is an email address and password.

The entire Bitcoin community, including the new businesses/exchanges now supporting it are aware of the strengths of Bitcoin, namely in providing payment freedom and anonymity when possible. You'll find most try to make your life easier for that.

Also, if you do happen to buy bitcoins traceable to you that you want to "disconnect" for whatever reason, you can use a mixing service.

Jefferson's picture

Thanks

for the info.

Being a newbie to all of this, I guess I would prefer a face to face exchange in my local city. I'm better at reading people in person. But, that would seem to require me and this "exchange person" to sit at a Starbucks (or someplace similar with wireless) and do the transaction on my laptop.
I'm wondering what kind of security I'd be giving up by allowing this person to help me with my transaction. (because I think I would need it)

Maybe I could ask MN to sell me some, even though he's probably loving the fact that BTC's have gone up considerably in "value" since he received his. I can see that conversation already. "Uhm...Let me think about it..NO."

I'm not looking to move 150k offshore or anything like that. I just want to convert a small amount of FRN's for either diversification or just to play around with. Not ready to put out more than I'm willing to lose at this point.

I think once the complexity

I think once the complexity and mystery has been taken out of Bitcoin it will not be seeing these massive fluctuations in price. It will become just another investment choice with decreased volatility. Especially if it gains any institutional investors. I foresee regulators cracking down on Bitcoin hard soon also. There may be little time left to take advantage of it as a highly speculative investment, IMO.

U.S. regulators

I think the "guidelines", or

I think the "guidelines", or whatever, for exchanges to follow to avoid money laundering charges does not apply to individuals.

Here is a

direct quote from the guidance:

"A person that creates units of this convertible virtual currency and uses it to purchase real or virtual goods and services is a user of the convertible virtual currency and not subject to regulation as a money transmitter."

I don't know how much clearer it could be. Also from the definitions section:

The Financial Crimes Enforcement Network ("FinCEN") is issuing this interpretive guidance to clarify the applicability of the regulations implementing the Bank Secrecy Act ("BSA") to persons creating, obtaining, distributing, exchanging, accepting, or transmitting virtual currencies.1 Such persons are referred to in this guidance as "users," "administrators," and "exchangers," all as defined below.2 A user of virtual currency is not an MSB under FinCEN's regulations and therefore is not subject to MSB registration, reporting, and recordkeeping regulations.

It later spells out what qualifies as exchanges, or administrators.

http://fincen.gov/statutes_regs/guidance/html/FIN-2013-G001....

Suggestions?

I am finding it very difficult to find non-biased information on the services I need to use to get started. Could you recommend a good wallet?

This may be the first time in my life I have felt so old and out of touch with technology.

Unlearning and self-teaching since 2008. Thanks, Dr. Paul!

Here:

This is a great forum:

www.bitcoinmoney.com/

This is a great pod cast:

www.omegataupodcast.net/2011/03/59-bitcoin-a-digital-decentr...

Services:

www.bitspend.net

www.bitpay.com

www.bitinstant.com

www.localbitcoins.com

Some sites:

www.bitcoinmagazine.com

www.weusecoins.com

www.coinbase.com

www.bitcoincharts.com

www.mtgox.com

www.elbitcoin.org

The software options:

www.multibit.org

www.bitcoinarmory.com

www.bitcoin.org (known as QT - it is the original software)

www.electrum.org

www.blockchain.info

www.strongcoin.com

www.coinbase.com

I would recommend you choose any of these wallet options under software options to get started aside from Qt and bit coin armory. This is because they are the hardest work with as a newbie to use. Armory builds on top of Qt. if you're really computer savvy I say go for it otherwise use any of the others. Read what each service has to offer and choose your favorite.

The best investment you can make is to educate yourself on how public key encryption works and how bitcoins works. Remember that silver right now is at an amazing price.

Peace!

"We’ve moved beyond the Mises textbook. We’re running in the open market." - Erik Voorhees

When in doubt

seek answers at the main Bitcoin forum https://bitcointalk.org

You won't find bias there, at least not any which will go unchallenged.

However, to answer your question I recommend reading the following:

http://bitcoinquickstart.com/how-do-i-store-bitcoins

Thanks!

Thank you.

Unlearning and self-teaching since 2008. Thanks, Dr. Paul!

Bitcoin screams scam in plain

Bitcoin screams scam in plain sight. That is the best type of scam. Bitcoin is not gold. It is not a coin. It is a series of digital ones and zeros. So, why does Bitcoin use an image of a gold coin and use "coin" in its name? The deception is in plain sight!

Have you really looked into Bitcoin?

Forever Liberty, I see you are a passionate and active member of the DP community, and have interest in a bunch of issues, so I wish you well and hope that you will take the time to try and understand the bitcoin system. I remember when I thought I knew *everything* about life, money, and everything that we take for granted... and then I WOKE UP to the fiasco that is our political system, the FRAUD that is our monetary system, and a bunch of other things I am sure we would agree on!

- so, please allow JixMainstream to educate you, and everyone here and instead of jumping to conclusion that you have no real arguements to back, try "attacking" or questioning JixMainstream's post at hand, I think you may find many people here who are ready and willing to help you, to guide you to where we all took A LONG TIME to arrive, an understanding of the Bitcoin protocol that goes beyond just a quick and dirty label of "scam" because it is not really a "coin" and "not gold"
- in fact the name is supposed to be suggestive of some of the properties of the protocol that allows its use as a medium of exchange that among many things has LIMITED QUANTITY, FUNGIBLE, TRANSFERABLE, and NOT FALSIFIABLE -- kind'a like our friend: 'Gold' and its next of kin; gold 'Coins'
- I don't think the name is meant to be deceptive, it is meant to be descriptive of the properties of the design of the protocol

Just plain 'Happy'about the direction the world is taking! Especially if we live to reach LEV [Longevity Escape Velocity]

Anyone who thinks a current Bitcoiner

Anyone who thinks every single Bitcoiner didn't once see the technology as just a flimsy set of "ones and zeros" is a fool. Of course we did. But we educated ourselves and learned exactly what the technology is capable of. Just as the Internet isn't absent of value, neither is Bitcoin. Yet they're both just "ones and zeros".

meekandmild's picture

how do you get money in your Wallet?

will that be next?

"Soon" :)

It will be soon. Part 2 will strictly be selecting the right wallet/client for the right job. Part 3 will be the first in a few parts about actually _getting_ Bitcoins.

I wish I could pump these out a little quicker, but life calls... -_-

Thanks for taking the time to

Thanks for taking the time to do this.

Send me some of your Gold for Bitcoins! :)

Actually, I am not in the market of trading bitcoins for gold, but that would be one way of getting bitcoins into your wallet. Another way would be to do what Michael did here on the DP and ask for people to donate to his wallet.

The "P.O. box address" of his wallet's "portal to his cache" of bitcoins is:

16oZXSGAcDrSbZeBnSu84w5UWwbLtZsBms

This is also called his "public key"

If you are curious to peek into his PO Box, you can! just search for it at wwww.blockchain.info

He now has 52.97877872 BTC there!

How did he get them? Simple, he ASKED FOR DONATIONS! :)

Just plain 'Happy'about the direction the world is taking! Especially if we live to reach LEV [Longevity Escape Velocity]

Bitcoin Privacy?

Seems to me this blows away the bitcoin privacy benefit.

Only if you choose to make

Only if you choose to make your transactions public.

Great Job!

Ive been reading up on this am having a difficult wrapping my head around the transaction fees.

Forgive me it was late when I was researching this but if I recall correctly(which I doubt)the dailybitcoin site it asks if you would like to delay payment to reduce transaction fees.

Um, ok. My quandery is: Can you make a transaction that has hundreds of addresses containing miniscule amounts of btc for a set fee, or are we paying for the amount of space the transaction occupies in the block chain?

Transaction fees calculator

I found this for you:

http://bitcoin.stackexchange.com/questions/3400/what-is-the-...

I believe that for now you can still get away with near-free transaction fees, but in the future you may want to avoid having too many addresses with "pennies" in them. Sorry I can't be more helpful.

Just plain 'Happy'about the direction the world is taking! Especially if we live to reach LEV [Longevity Escape Velocity]

excellent

Thank you very much. Now to figure out how in the hell to buy the damn things without 50 damn hoops to jump through.

Thanks so much! I posted a

Thanks so much! I posted a thread asking about bitcoins and I got some great responses but you're pretty much holding my hand. Thank you and I look forward to more posts about bitcoins.

Big thumbs up, very well

Big thumbs up, very well written! :)

Started using Bitcoin about 3 weeks ago and still learning a lot.

Starting to see so many awesome opportunities with this technology! :)

But like with everything else: don't put all your eggs in one basket and with this technology still being in development: do not put more in it than you're willing to loose in a worst case scenario basically
(but doesn't this apply to all financial instruments / currencies?!?)

Just think about the fact that this is the first time in history where both a currency and the payment network (a global one!) is not owned by a small group of powerful people.

It's going to to for the financial world what e-mail did to the postal services, if not more.

Also a nice link to follow news: www.reddit.com/r/Bitcoin/

I think Bitcoin is very nice for global transactions. Precious metals are historically very good at being a store of value. Checking vs. savings account kind of thing. :)

May I disagree with you?

I am in the "all in" category of Bitcoin enthusiasts... luckily that is still not so much, but the reason I did that is, well, if you BELIEVE in something, you might as well go all in! No?

:)

I support(ed) Ron Paul 110% and NEVER let anyone bully me to think otherwise! Okay, I know these two things are not exactly the same thing, but I know I am not the only "all in" person.

Now that the Bitcoin exchange rate is sky-high, friends are saying: "Hey, at least take out what you've invested..." To that I say: "I am FULLY BEHIND CHANGING THE SYSTEM FOR GOOD!"

So, if you believe this is the solution, as I do, then you may not be so "careful" as to diversify etc... :)

Just plain 'Happy'about the direction the world is taking! Especially if we live to reach LEV [Longevity Escape Velocity]

Too be honest: I know exactly

Too be honest: I know exactly how you feel. :)

It's only my personal strict set of rules that help me limit exposure to a particular financial instrument or currency no matter how good it might look.

But emotionally, I completely understand the 'changing the system' feeling and want to dive in over 100% if possible.

I started with $50, I'm now in well over 20 times that much in 2 weeks... ;o

I'll keep putting money in, every single time I earn something a certain percentage goes to BTC. I'll not forget my "precious" either though :))

Another way to help the changing process though, is by promoting it. I've already brought 6 friends to BTC now. And 1 of them has already spread it to two other people.

Putting your own cash in is one thing, but networks become exponentially more valuable with every extra added 'node' (person in this case) added! :))

why all the hubub over bitcoin?

I do not understand all the excitement over bitcoin? I can just about guarantee that if bitcoin were ever to make it to the point where it was really used as currency, the whole system would be compromised. Which I suppose would make it on the same level as paper money. But paper money would still take some resource to counterfeit.

Of course, i could be wrong. But I'll stick with my gold and silver.

Bitcoin is already used as a "currency"

It is not, yet, on the same level as paper money, but it is on its way to make some waves I think.

You know why I like bitcoin, because it is supposed to be counterfeit-proof! So, with that in mind, I will offer anyone 2 bitcoins for a good quality counterfeit one!

Why?

Because I know it would be such a rarity that it is worth it! :)

Just plain 'Happy'about the direction the world is taking! Especially if we live to reach LEV [Longevity Escape Velocity]